Corporate Insolvency - What Directors Need to Know

 

The first of the five most significant things they need to know is that whether the company is insolvent or not, directors must ensure they do not breach their statutory duties. There are seven duties under the Companies Act 2006 with which a director must comply, but in general terms directors are bound to act within the best interests of their company at all times and must always use reasonable care and skill when acting as a director.

 

If a director breaches their statutory duty an interested party can bring a claim against the director personally. If their claim is successful, the director may be ordered to pay back into the company any loss it has suffered as a result of his failure to comply.

 

The remaining four issues apply to directors of companies that are insolvent and in which a liquidator has been appointed under the provisions of the Insolvency Act 1986.

 

A director could face action against him for wrongful trading if the company continued to trade when the director either knew or should have known that the company could not avoid being liquidated. In this case, an application can be made by the liquidator for the director to personally pay a sum of money to the Company and thereby compensate the creditors.

 

A director could also face action against him for fraudulent trading where he either knew or should have known that the company could not avoid being liquidated and where there was some specific intention of defrauding creditors. Again, any action is brought by the liquidator to compensate the company and creditors but, in addition, trading fraudulently is a criminal offence that carries a prison sentence.

 

Directors sometimes also give personal guarantees on company borrowings such as loans or overdrafts. If a company is liquidated and the creditor is unable to get their money back then the personal guarantees may well be enforced against the director personally. This can apply even if a company goes into another form of insolvency such as administration or a company voluntary agreement.  

 

The final thing to consider is disqualification under the Company Directors Disqualification Act 1986. The court has a wide range of powers to disqualify directors of insolvent companies. If a director wrongfully or fraudulently trades, they may find themselves subject to disqualification from acting as a director for anything from 2-15 years. Breach of a CDDA order is also a criminal offence.

 

Directors should therefore seek legal advice from an insolvency specialist if their company is or is about to be insolvent.

 

* Paul Monaghan is a solicitor with BHP Law. He can be contacted on 0191-221 0898.